Proposed Calif. Producer Compensation Regulation Confusing, Unnecessary Says ACIC

December 22, 2004

The Association of California Insurance Companies (ACIC) strongly criticized a proposed California Department of Insurance regulation on insurance agent and broker practices because the measure is overly broad, poorly drafted, and fails to deliver meaningful information to the consumers who need it most.

In a written statement submitted prior to a Jan. 6 regulatory hearing on the proposed rule, the ACIC stated that while it recognized the Department of Insurance’s intent to address current issues relating to broker compensation, the proposed regulation “fails to focus on the fundamental issues of broker disclosure and fails to comply with the statutory standards for the adoption of regulations.”

“We understand that in the wake of the allegations of illegal bid-rigging by a few large brokers arising from the investigation by New York Attorney General Eliot Spitzer, state insurance regulators want to respond quickly to restore consumer confidence in the insurance industry,” said Sam Sorich, ACIC president. “In fact, ACIC supports the general disclosure of broker compensation and believes that such disclosure is an important component of open, fair and well-regulated markets.

“Unfortunately, the California Department of Insurance proposal misses the mark by expanding disclosure requirements to all insurance sales representatives – including agents and salaried employees of insurance companies. Moreover, the regulation would create unreasonable requirements that no insurance agent or broker would be able to understand, let alone meet,” said Sorich.

The proposed regulation would require insurance brokers and agents to disclose the amount and methods for computing their compensation to clients and prospects. ACIC believes the disclosures are unwieldy and that any new disclosures should be focused on brokers, not agents. Insurance brokers, by law, represent the client in the insurance transaction and can be paid by both the client and the insurance company. Insurance agents, on the other hand, represent one or several companies and are compensated by the insurer.

ACIC is urging state regulators to establish a “bright line” test to determine when disclosure of compensation is necessary. “Consumers need to know when broker compensation could create a conflict of interest,” said Sorich. “A single objective standard should be used: Where there is dual payment from both the client and the insurance company, there should be disclosure. There is no need for disclosure in the simple agent situation since in that situation, the agent is paid solely by the insurance company and no conflict of interest exists. Recent allegations of misconduct do not involve the action of agents.”

Further, the regulation would require insurance agents and brokers to place the client’s business with “the best available insurer.” Sorich stated that the requirement violates the standard of clarity and would create a flurry of litigation against agents and brokers for failing to meet the ill-defined concept of “best available insurer.” “There is no way the term ‘best available’ could be easily understood. The regulation asks for an impossibly subjective determination likely to be questioned after the fact when a problem occurs.” said Sorich.

“The problems identified in the Spitzer investigation are limited to broker relationships. We believe that regulatory or legislative solutions should focus on those situations. The Department of Insurance proposals cast such a wide net that every insurance agent and broker will become entangled in it, leading to another layer of needless bureaucracy, driving up the cost of doing business in the state and delivering little if any value to California consumers,” said Sorich.

A complete copy of the ACIC statement is available by contacting Maria Altamero at (916) 449-1370 or maria.altamero@acicnet.org.

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